Yellen’s goof hands GOP a potent campaign issue
Treasury Secretary Janet Yellen stepped in it big time on Monday when she warned: “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”
This was a major goof. Yellen inadvertently handed Republicans yet another powerful weapon in their quest to retake control of Congress in 2022: blaming Democrats for prices moving higher. If we are on the verge of the economy overheating, clearly the $1.9 trillion American Rescue Plan was excessive (as many of us argued at the time) and President Biden’s proposed $4 trillion infrastructure plan is outrageously reckless.
Going into the midterm elections, Republicans can campaign on broken borders, closed schools and now…rising prices. That’s compelling.
Democrats seem convinced voters will reward Biden’s giant spending blitz, and especially those $1,400 checks included in the recent stimulus bill, by allowing them to keep the House and the Senate.
But for millions of Americans, those checks are already in the rear-view mirror, while the reality of rising grocery and gasoline prices is the speedbump straight ahead. Inflation could well become the kitchen-table issue of the midterm elections. And Biden may take the blame.
Yellen, realizing that her comments created a squall on Wall Street, joined several brainiacs at the Federal Reserve in reassuring us that inflation was not a serious issue. Yes, prices may go higher for a bit, she argued, but, not to worry, the Fed will step in if necessary.
Here’s the problem: Yellen, Federal Reserve Chairman Jerome Powell and all the other folks trying to calm our inflation fears have clearly not gone to the supermarket recently. People don’t care whether the rise in diaper and Coca-Cola prices is a one-off and unlikely to be repeated next year; they are seeing their spending power drop…now. And it could get worse.
It’s one thing to read that the consumer price index just posted the largest month-to-month gain in nine years, that commodity prices are on a tear and that tech stocks are being battered by expectations that interest rates may rise.
It’s another to pay 10 percent more for chicken breasts and pork chops, 6 percent more for cheddar cheese and eggs, and nearly $3.00 per gallon to fill up your car, up from $1.81 a year ago.
Not only are grocery prices rising, car prices and rents are moving up as well. These are things people notice.
Democrats don’t seem to care about massive budget deficits. Biden continues to tell Americans that our economy and our country are in dire straits and need his trillions in social engineering medicine to heal our woes. He has yet to acknowledge that, like most prescriptions, an overdose can kill you.
What Yellen should have said was: We don’t know if inflation will accelerate, because we have never seen such massive levels of federal spending combined with ultra-low interest rates and ongoing asset purchases. We have never experienced an economy shut down by fiat being unlocked when we also have $3 trillion in “excess” savings and the money supply is $4 trillion above “normal” levels.
And: We have never lived through all these things happening as other economies around the world are also gathering steam.
Yellen should have admitted: We are in uncharted waters and have no idea what’s coming next.
But that would call for some prudence, and some humility.
Ed Hyman, a top Wall Street economist, says inflation is not coming; it is here. He points to the huge increase in commodities prices, higher oil prices (today $65 per barrel for West Texas Intermediate crude versus $24 a year ago), increased import prices, sky-high lumber prices ($96/sheet today up from $38 a year ago), investor inflation expectations, and the recent CPI data (2.6 percent, well above the Fed’s 2 percent target) as proof.
Not only are prices rising on all kinds of industrial and household goods, labor costs are increasing as well. In the first quarter, the employment cost index beat estimates by jumping 3.7 percent at an annualized rate, the highest level reached since before the 2008 financial crisis.
It is rising labor costs that could tip inflation from transitory to structural. Surprisingly, wages and benefits are climbing even as Biden’s rationale for the $1.9 trillion American Rescue Plan centered on putting people back to work. If unemployment is so high, why are employment costs rising so fast?
Two reasons: first, labor is tight in part because Congress, as part of the American Rescue Plan, extended the extra $300 per week in emergency federal unemployment benefits through September. Studies show that nearly half of people receiving unemployment are making more staying home than they would if they went back to their jobs. Why work?
Second, only 60 percent of the nation’s schools are fully open, making it difficult for women, especially, to return to their jobs.
The latest employment report, showing only 266,000 jobs were added in April, speaks more to a scarcity of workers than any slump in demand.
Rising wages should help working Americans, but only if their gains are not eaten up by higher prices.
Yellen is confident that the Fed is on top of the problem. We wonder.
Eric Rosengren, president of the Boston Fed, said recently, “My view is that this acceleration in the rate of price increases is likely to prove temporary…Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce.”
Someone might want to alert Mr. Rosengren that Clorox recently announcedthat it may have to raise prices because of increasing materials and transportation costs. Scarce or not, Clorox products are about to become more expensive.
https://thehill.com/opinion/finance/552360-yellens-goof-hands-gop-a-potent-campaign-issue
Published on The Hill
